Box Shows How The Freemium Model Is Growing Up

One nearly grey-haired software executive recently asked me, half-jokingly: "Will Aaron Levie ever not be 26 years old?" And yes, Levie, the frizzy-haired youth who wants to make things "sexy" (his word, not mine) in the often stodgy enterprise software industry is now 27. He has been running Box, the popular file sharing and collaboration Web service, for six years.

Box counts 10 million users in 120,000 business and claims to have a foothold in 82% of the largest companies in the world. Levie sees room to grow. He has raised $162 million in venture funding to do big things, pegging the company with a rumored $600 million valuation.

This week he announced plans to turn Box into a app store of sorts for the myriad software that relates to file sharing and collaboration. It is called OneCloud. The idea is that these apps in the cloud will finally be able to exchange data. So that, for example, a file opened in QuickOffice could be edited and then saved automatically back into Box. Levie has signed up 30 apps into OneCloud and is aiming to double that roughly every month.

If successful, Box becomes much more than it is today. It also goes from a narrow, if useful freemium Web service to the key data connector inside an enterprise.

But there is a lot of competition: Microsoft's Sharepoint, the industry heavy weight, alongside smaller rivals including SugarSync, Intralinks, YouSendIt, Nitro and dozens of others. Then there is the bevy of more consumer-focused offerings such as Dropbox, Apple's iCloud and soon perhaps, a cloud storage service from Google. And all this is pushing Box to look more like an enterprise software company than perhaps Levie could have imagined.

When I wrote about Levie in Forbes magazine just a year ago he was little more than a guy with a few dozen engineers and a slick Web service. He was lining up millions of users by giving away his service free of charge with an option to upgrade. This is common in consumer offerings, but until recently it was an unthinkable notion in the top-down, security-focused world of big business IT.

Levie was making it work. In 2010, Box did $11 million in sales. He was convincing around 8% of those freemium users to pay up with little effort. "No guys with gold watches calling on customers," he told me.

There is surely magic in being able to try something before you buy it. Especially in enterprise software, an industry notorious for selling customers bloated, in-operable shelf-ware. Levie's early success with freemium raised interesting questions about the way big software is bought and sold. Would the future Oracles and Salesforce.coms of the world always need fleets of aggressive salespeople on the road every day pitching their wares? Or was that model broken, too forced? Perhaps in the era of consumerization in IT end users would do the finding and tell their IT departments to just make it work. IT departments, then, became simple enablers not first or even direct buyers of software.

The answer is turning out to be a little bit of both. And Levie does need pushy salespeople just like the enterprise giants he sometimes takes shots at.

A year ago Box had just 30 salespeople, and most were taking inbound calls from IT departments wondering what their employees were up to with this Box thing. This year Levie plans bring his salesperson tally up to over 200, a huge leap. It turns out enterprise software sales need a push and maybe a shove to happen.

This isn't a failure of the freemium model, Levie says. He explains it his way: "Instead of having salespeople blanket calling prospects who they have no indication are interested in the product, freemium tells you who is most likely to buy your product. What if Salesforce could do that? It would be so much more efficient." No doubt Salesforce.com CEO Marc Benioff would welcome some efficiency in his salesforce. Sales and marketing currently eat up half of the company's revenues, a massive expense to just keep reaching new customers and maintaining relationships with old ones.

But Salesforce is also nearing $3 billion in sales, meaning it has picked the low-hanging fruit of customers and likely has to work hard for new wins. Salesforce, meanwhile, is tiny, actually, when you consider Oracle's $37 billion.

Five years from now, should Levie's dreams for Box come true, he probably will have salespeople cold calling IT departments. This isn't to say freemium is broken, but rather it is seeming evolutionary over revolutionary when it comes to how big software gets sold. There's a still enormous advantages to being able to try before you buy. That customer view, up front, should make enterprise software better because he bar is high from the start.

I enjoy discovering hidden gems: little-known, hard-charging entrepreneurs with disruptive ideas (and a track record of success). During a decade-long stretch at Forbes Magazine, I authored early profiles of Marc Benioff of Salesforce.com, Drew Houston of the Web file-shari...